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Lifetime Allowance and Penalty Tax

Generally, a test against the lifetime allowance is carried out when benefits are taken before age 75 or, if not already taken, at age 75.

If the member has taken benefits as drawdown before age 75, then there will be a second test against the lifetime allowance at age 75 or earlier, if they purchase an annuity from these drawdown funds. See our question on Are there rules to prevent benefits being double counted? www.aegon.co.uk/support/faq/pension-technical/Benefit-crystallisation-event3.html#expandable-item-41734

Assuming there is uncrystallised funds at age 75 and benefits exceed the member’s remaining lifetime allowance, a lifetime allowance charge of 25% will apply to any excess over his remaining lifetime allowance. It is a 25% tax charge as the benefits will remain unvested as reaching age 75 doesn’t not mean that benefits have to be taken. This is assuming that the member doesn’t want to take their benefits at this exact time.

When the member does comes to take benefits, any income they take will be taxed at their marginal rate. See Where a BCE is triggered at age 75 (BCE 5, BCE 5A and BCE 5B) from HMRC’s PTM at www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm085000.

Please note however that some older pension products may still make members take their benefits before age 75.

Example:

Mr Jones is turning age 75, has an uncrystallised pension fund of £1.3m and has fixed protection 2016.

  • On his 75th birthday, his fund is tested against his remaining lifetime allowance. He has £50,000 excess over his lifetime allowance so this will result in a 25% tax charge from his pension fund.
    So, £50,000 x 25% = £12,500 leaving him an unvested fund of £1,287,500.
  • He takes his benefits at age 76 as drawdown and is not subject to any further tests against the lifetime allowance. He can still take a tax-free lump sum and any drawdown income he takes will be taxed at his marginal rate.

 

FOR INVESTMENT ADVICE REGARDING YOUR PENSION OR OTHER INVESTMENTS PLEASE CONTACT Elliott Wilson ACSI DipPFS AF3

 

While we keep information on the website as up to date and as accurate as possible, the information on this website does not form part of our advice process. Cambridge Pensions Ltd cannot accept any liability for any decisions made by a client or member of the general public based on any information contained on this website. The value of your investments can go down as well as up and you may get back less than has been paid in.

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